A Company Is Considering a Proposed New Plant That Would

question 7

Multiple Choice

A company is considering a proposed new plant that would increase productive capacity.Which of the following statements is CORRECT?

• A) In calculating the project's operating cash flows,the firm should not deduct financing costs such as interest expense,because financing costs are accounted for by discounting at the WACC.If interest were deducted when estimating cash flows,this would,in effect,"double count" it.
• B) Since depreciation is a non-cash expense,the firm does not need to deal with depreciation when calculating the operating cash flows.
• C) When estimating the project's operating cash flows,it is important to include both opportunity costs and sunk costs,but the firm should ignore the cash flow effects of externalities since they are accounted for in the discounting process.
• D) Capital budgeting decisions should be based on before-tax cash flows because WACC is calculated on a before-tax basis.
• E) The WACC used to discount cash flows in a capital budgeting analysis should be calculated on a before-tax basis.To do otherwise would bias the NPV upward.

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A type of nerve damage that can occur with diabetes, affecting primarily the legs and feet.

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Specialized cells in the pancreas responsible for the production and release of insulin.

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A form of diabetes mellitus where the pancreas produces little to no insulin, requiring daily insulin administration.

Type 1 DM

A chronic condition where the pancreas produces little or no insulin, necessitating daily insulin administration.